Defined Benefit Plans for Self-Employed Professionals: A Simple Explainer

Retirement planning is a top concern for independent contractors, small business owners, and other self-employed professionals. The right choice for you will depend on a number of factors like your personal goals and income level, which you can discuss with a financial advisor.  

A defined benefit plan is one retirement planning option to explore. MBO Partners provides information on defined benefit plans and other retirement planning topics to help guide your decision. 

Common Questions About Defined Benefit Plans

What Is a Defined Benefit Plan?

The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans. For the purposes of this blog, we’ll focus on defined benefit plans.  

The definition of a defined benefit plan is fairly simple. Think of a defined benefit plan like a pension plan for independent contractors.  

While this retirement option is more costly to implement and maintain, it does allow for significantly larger contributions than other retirement plans for self-employed professionals. These retirement plans include a solo 401(k) for self-employed—also known as an individual 401(k) for self-employed—or IRA plans for self-employed such as an SEP IRA. 

When setting up a defined benefit plan, you’ll collaborate with an actuary to determine your retirement payout. The actuary will calculate your required monthly or annual contributions based on factors such as your desired payout, age, and expected investment returns.  

While defined benefit plans can be complex, they may be an excellent choice if you’re a high contributor aiming to maximize your retirement income. 

Who’s Eligible for a Defined Benefit Plan?

Eligibility for a defined benefit plan typically includes: 

• Self-employed professionals: Individuals (such as independent contractors) with high and stable incomes who want to maximize their retirement savings. 
• Small business owners: Those who can commit to making significant contributions on a consistent basis and may want to offer retirement benefits to employees. 
• Employees: Full-time or part-time employees of companies offering a defined benefit plan, based on eligibility criteria set by the employer (such as age, length of service, or hours worked). 

What Are the Advantages of a Defined Benefit Plan?

A defined benefit plan offers high contribution limits, allowing your earnings to grow tax-deferred until retirement, at which point they are taxed upon withdrawal. Contributions are also tax-deductible as a business expense (within IRS limits), helping to lower your taxable income. 

These plans can be paired with other retirement options, such as a solo 401(k) or SEP IRA, allowing you to increase your annual retirement savings.  

Additionally, defined benefit plans offer risk mitigation for your future finances because creditors cannot seize plan assets. This means your retirement savings remain protected, even if your business faces legal challenges. 

What Are the Disadvantages of a Defined Benefit Plan?

Like some other retirement accounts for self-employed professionals, defined benefit plans can be complicated to set up and costly to run. Plan on paying startup fees, administrative requirements including annual actuarial calculations, and filing fees for IRS Form 5500. You’ll also have to commit to funding your plan at a minimum level each year in order to meet payout requirements, regardless of how your business fares. 

If your small business has employees, you are required to offer the defined benefit plan to them as well, which can add to the cost. These plans usually take at least three months to set up, so it’s important to account for this timeline in your planning. Additionally, early withdrawals from the plan are subject to penalties. 

Defined benefit plans are best suited for independent contractors with high, stable incomes who want to accelerate their retirement savings and have few or no employees. The ideal candidate is someone who can make annual contributions of $80,000 or more for at least five years. 

Check Out: Filing Self-Employed Tasks: What Independent Contractors Need to Know  

Are There Contribution Limits of Defined Benefit Plans?

An actuary will determine annual contribution amounts for your defined benefit plan based on many factors including age, compensation, and retirement age. These contributions cannot surpass the legal IRS limit ($275,000 for 2025). 

Employees are eligible for a defined benefit plan if they have worked more than 1,000 hours in a year, have been with your company for over one year, and are 21 years or older. 

What’s an Example of a Defined Benefit Plan?

Example: Small business owner 

Chelsea, age 60, is a small business owner and her average annual income is $400,000. She plans to retire when she is 70 and ultimately wants to set aside $1 million using a defined benefit plan.  

Working with an actuary, Chelsea determines that her monthly contributions will be $7,500, or $90,000 per year, to meet her goal. 

Do You Have More Information About Defined Benefit Plans?

You can find more information about defined benefit plans through trusted sources like the IRS website, which provides detailed guidelines on retirement plans. That way, you’ll be able to make the best decision for your small business. 

Also, financial advisory firms, retirement plan providers, and industry organizations such as the Society of Actuaries or the Employee Benefit Research Institute offer valuable resources to help you understand how these plans work and how they can fit into your financial goals. 

Where Can I Find Additional Retirement Planning Resources?

If you’re seeking more information on retirement plans for self-employed professionals or other resources to support your work as an independent contractor, MBO Partners has you covered. For details on your retirement options, check out our list of resources on retirement planning.  

And be sure to take a look at other valuable tools and expert insights designed to ensure your success at every stage of your career, covering topics like branding, marketing, taxes, technology, and more. 

If you’re interested in your next work opportunity, MBO’s talent marketplace offers a wide range of options tailored to independent contractors. Explore the latest opportunities to find ones that match your skills and expertise, helping you grow your career on your terms. 

This content from MBO Partners does not constitute legal or financial advice.